Will Freemium Cloud Services Disappear?

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A number of cloud-based storage providers are still trying to use the freemium model to build a customer base. Some of these companies pour a third or more of their revenue into marketing and sales as they try to find a sustainable business model.

Years ago, this model worked for Salesforce because they found an uncompetitive ecosystem and took advantage of it to create traction within the small to medium market and later moving to enterprise-level clients. Unfortunately, this model isn’t working as well for today’s cloud storage providers. When you have to compete against companies like Amazon, Google, Apple, Microsoft, and many others, you need to take a different approach.

In spite of this, providers keep experimenting with the freemium cloud services concept. This could be because most cloud startups don’t realize that this method no longer works. When everyone is giving away increasing amounts of free storage in order to create a sticky user base, it’s difficult to enter the space.

Another problem with the freemium cloud services model is that the growth the service providers experience can often be a double-edged sword. With many of the providers focusing on adding additional bandwidth, functionality, or storage space to get users to upgrade, additional infrastructure growth is required to make this happen.

When it comes to building or using an existing data center provider during the start-up phase, the choice is clear. These cloud service providers should budget for growing their company instead of the huge initial capital expense of building a data center. By using a pre-existing data center, they can focus on growing a sustainable start-up.

Creating a sustainable start-up

One of the fundamentals of a sustainable start-up is that it can’t burn through its initial venture investment believing that more money will always be available. It also can’t bet its entire business model on a large volume of nonpaying users. Instead, it must justify its value by having paying users in its core markets. These people find enough value in the cloud storage services to pay for it on an ongoing basis.

Conclusion

“After five years of betting on growth from the consumer upwards, cloud storage startups are finally waking up to the bottom line,” said Vineet Jain at Egnyte.com.

New players in the cloud services arena really have two choices. They can either carve a niche for themselves or plan a graceful exit. This is particularly true for companies in the enterprise software arena.